Double Entry Model

Irrecoverable Debts and Their Recovery

An irrecoverable debt (also called a bad debt) is a trade receivable that the business is certain will never be recovered — the customer cannot or will not pay.

Writing Off an Irrecoverable Debt

When a debt is confirmed as irrecoverable, it must be removed from trade receivables and recorded as an expense.

Double entry:

• DR Irrecoverable debts (expense account — income statement)
• CR Trade Receivables — individual customer account (sales ledger)

The SLCA is also reduced by the same amount (CR SLCA).

Ledger Account Example

Torrance Ltd owes £620 and is confirmed insolvent. The debt is written off.

          Trade Receivables — Torrance Ltd
Dr                                        Cr
Balance b/d  620  |  Irrecoverable debts  620

              Irrecoverable Debts Account
Dr                                        Cr
Torrance Ltd 620  |  Income statement     620

The £620 appears as an expense in the income statement, reducing profit.

Recovery of a Previously Written-Off Debt

If a customer later pays a debt that was previously written off, two entries are needed:

Step 1 — Reinstate the debt:

• DR Trade Receivables (individual customer account)
• CR Irrecoverable Debts Recovered (income account)

Step 2 — Record the receipt:

• DR Bank
• CR Trade Receivables (individual customer account)

The recovery is income (not a negative expense) — it goes through its own income account and appears in the income statement, increasing profit.

Effect on the Financial Statements

Irrecoverable Debts vs Provision for Doubtful Debts